Final Exam - BACC 7123
Identify the three broad categories of management assertions.
1. Assertions about classes of transactions and events for a period under audit. 2. Assertions about account balances at period end. 3. Assertions about presentation and disclosure
Which of the following types of audit evidence is generally the most reliable?
A bank confirmation.
The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction − related audit objective?
Accuracy
Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the _____ assertion.
Accuracy and valuation
Which of the following statements is usually true?
An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.
When the auditor scans the sales journal looking for large and unusual transactions, he is gathering what type of evidence?
Analytical procedures
An _____ is the detailed instruction that explains the audit evidence to be obtained during the audit.
Audit procedure
Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?
Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
Which of the following is a primary consideration when assessing inherent risk?
Existence of related parties, Nature of client's business, Susceptibility to misappropriation of assets
Management makes the following assertions about account balances:
Existence, completeness, valuation and allocation, and rights and obligations.
A high detection risk equates to a low amount of audit evidence needed.
FALSE
Audit documents are joint property of the auditor and the audit client.
FALSE
If an auditor does a test in the wrong direction, sampling risk will increase.
FALSE
Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective.
FALSE
Since the audit risk model is a planning model, it assists the auditor in evaluating results.
FALSE
The audit risk model that must be used for planning audit procedures and evaluating audit results is: DR / IR * CR = AAR.
FALSE
The effect of a violation of the completeness transaction - related audit objective for cash disbursements transactions would be an overstatement of cash disbursements.
FALSE
The transaction - related audit objective that deals with whether recorded transactions have actually occurred is the completeness objective.
FALSE
Which of the following IS one of the steps used to develop audit objectives?
Know the management assertions about the financial statements, divide the financial statements into cycles, know the specific audit objectives for classes of transactions.
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not _____ are detected.
Material to the financial statements
Auditing standards make _____ distinctions between the auditor's responsibilities for searching for errors and fraud.
No
When the auditor uses the audit procedure vouching she is primarily concerned with which of the following audit objectives when testing classes of transactions?
Occurrence
_____ deals with potential overstatement and _____ deals with understatements (unrecorded transactions).
Occurrence; completeness
Which of the following is a correct relationship?
Planned detection risk and inherent risk have an inverse relationship.
Determining that the footnote disclosures related to long term debt are accurate is an example of the _____ audit objective.
Presentation and disclosure
Which of the following forms of evidence would be least persuasive in forming the auditor's opinion about marketable securities and other investments held by the company?
Responses to auditor's questions by the president and controller regarding the investments account.
Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence?
Sample size AND timing of audit procedures.
Which of the following is the risk that an auditor will reach and incorrect conclusion because a sample is NOT representative of the population?
Sampling risk.
Which of the following statements is true of a public company's financial statements?
Sarbanes Oxley requires both the CEO and CFO to certify the financial statements.
Accounts that require considerable judgement have a higher inherent risk.
TRUE
Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.
TRUE
An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence, assignment of more experienced personnel and/or a more extensive review of audit files.
TRUE
An audit generally provides no assurance that illegal acts that do not have a direct effect on the financial statements will be detected.
TRUE
An auditor assesses the risk of material misstatement to determine the impact on the auditor plan and to determine the nature, extent, and timing of the audit procedures.
TRUE
As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.
TRUE
Auditor judgement is the primary determinant in determining the amount of evidence gathered.
TRUE
Confirmations are among the most expensive type of evidence to obtain.
TRUE
If a particular internal control is not followed by the client exactly 6% of the time, and the auditor's tests of that control find three control violations in a sample of 50, the sample is considered to be representative.
TRUE
If a sale was for a valid shipment, but the amount of the sales invoice was calculated incorrectly, the accuracy objective was violated.
TRUE
If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as low.
TRUE
Rights and obligations is the only balance - related assertion without a similar transaction - related assertion.
TRUE
The auditor's audit objectives follow and are closely related to management assertions.
TRUE
The type of audit evidence known as inquiry requires the audit to obtain oral or written information from the client in response to questions.
TRUE
When an auditor has reduced assessed control risk based on tests of controls, he or she may then reduce the extent to which the accuracy of the financial statement information directly related to those controls must be supported through the accumulation of evidence using substantive tests.
TRUE
Which one of the choices below is most correct regarding a cause of sampling risk?
Testing less that the entire population.
Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?
The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.
Audit documentation of the evidence gathered by the auditor should meet which of the following criteria?
The content is sufficient to provide support for the auditor's opinion, including the auditor's representation as to compliance with auditing standards.
Two overriding considerations affect the many ways an auditor can accumulate evidence: 1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. 2. Cost of accumulating evidence should be minimized.
The first is more important than the second.
Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?
The general audit objectives are applicable to every class of transactions.
Which of the following is the most objective type of evidence?
The physical count of securities and cash
Which of the following statements regarding the relevance of evidence is correct?
To be relevant, evidence must pertain to the audit objective of the evidence.
The permanent files included as part of audit documentation do not normally include
a copy of the current and prior years' audit programs.
When practical and reasonable, US auditing standards require the confirmation of
accounts receivable.
The posting and summarization audit objective is the auditor's counterpart to management's assertion of
accuracy.
An example of an external document that provides reliable information for the auditor is
an bank statement.
The evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data is the definition of
analytical procedures.
Two determinants of the persuasiveness of evidence are
appropriateness and sufficiency.
The detail line in objective is not concerned that the details in the account balance
are properly disclosed in accordance with GAAP.
Evidence is usually more persuasive for balance sheet accounts when it is obtained
as close to the balance sheet date as possible.
As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the
assurances provided by audit procedures to a lower level.
When making audit evidence decisions,
audit engagement software can assist the auditor in making evidence decisions.
To determine if a sample is truly representative of the population, an auditor would be required to
audit the entire population.
The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must
be persuasive enough to enable the auditor to issue an audit report.
If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely
be reduced.
If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testingcontrols, and analytical procedures, then the auditor
can significantly reduce other substantive tests.
"Physical examination" is the inspection or count by the auditor of items such as
cash, inventory, securities, notes receivable, and tangible fixed assets.
If a short term note payable is included in the accounts payable balance on the financial statements, there is a violation of the
classification assertion.
The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the
company management.
An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and a
critical assessment of the audit evidence.
The term audit objective refers to all of the following except for
cycle related audit objectives.
If the auditor decides to reduce acceptable audit risk, planned detection risk
decreases.
An auditor can increase the likelihood that a sample is representative by using care in both
designing the sampling process AND designing the sample selection.
When assessing risk, it is important to remember that
detection risk can only be determined after audit risk, inherent risk, and control risk are determined.
Planned detection risk
determines the amount of substantive evidence the auditor plans to accumulate.
Management assertions are
directly related to the financial reporting framework used by the company, usually US GAAP or IFRS.
Another term for misappropriation of assets is
employee fraud.
Inherent risk and control risk differ from planned detection risk in that they
exist independently of the financial statement audit.
The primary purpose of audit procedures is to
gather corroborative audit evidence about management's assertions regarding the client's financial statements.
An auditor most likely would apply analytical procedures in the overall review stage of an audit to
identify unusual or unexpected balances that were not previously identified.
The auditor's best defense when material misstatements are not uncovered is to have conducted the audit
in accordance with generally accepted auditing standards GAAS.
One of the causes of nonsampling risk is
ineffective audit procedures.
Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as
inherent risk.
The measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as
inherent risk.
Inherent risk and control risk are
inversely related to detection risk.
The classification balances - related audit objective
involves determining if items included on a client's listing are included in the correct GL accounts.
In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud
is greater for management fraud because of management's ability to override existing internal controls.
The permanent audit file would usually include the
organizational chart of the company's employees.
The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is
planned detection risk.
Auditor's accumulate evidence to
reach a conclusion about the fairness of the financial statements.
The two characteristics of the appropriateness of evidence are
relevance and reliability.
A sample in which the characteristics of the sample are the same as those of the population is a
representative sample.
According to PCAOB audit standards, audit documentation must be retained for
seven years.
Audit documentation
should identify the items tested when the audit procedures involve sampling of transactions or balances.
Audit procedures can result in significant, unexpected differences. The auditor should investigate further if BOTH
significant differences are not expected but do exist AND significant differences are expected but do not exist.
Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n)
test of details of balances.
The procedures used to test the effectiveness of the internal controls are known as
tests of controls.
The objective of an audit of the financial statements is an expression of an opinion on
the fairness of the financial statements in all material respects.
The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to
trace a sample of shipping documents to related duplicate sales invoices.
Factors that determine the auditor's willingness to accept a document as reliable evidence include,
whether it is an original document or photocopy, whether it was created and processed under conditions of effective internal control, whether it is internal or external.
